Many Americans think their credit score is higher than it actually is. This may be because we are always receiving offers for pre-approved loans or qualifying for a new line of credit. However, many of us inflate our credit scores without knowing how they are determined. Learn about the major factors that affect your score and three practical ways to improve it.
Credit Utilization Ratio
A major component of your credit score is your credit utilization ratio. The credit utilization ratio is the amount you spend compared to the total amount of credit available. A healthy utilization ratio should be less than 30%. To calculate your utilization limit, add up all the maximum limits on your accounts. For example, if you have 2 accounts with a $2,500 limit on each, your total credit limit is $5,000. Next, multiply this total amount by 30% or .30. [$5,000 x .30 = $1,500]. To maintain a healthy utilization ratio, you should spend less than $1,500 per month and pay off your balance. If you want to boost your credit score, limit use to under 10%, or $500 if using the same $5,000 example. Refer to this budget planner to find out how you can manage your spending.
Some of us do not want to or are unable to maintain a low credit utilization ratio. Instead another way to increase your score is to find out when your bank or credit issuing agency reports to the credit bureaus. This is usually around your statement closing date or due date. Your bank or issuing agency sends a monthly report of your credit limit, remaining balance, and payment history. The credit bureaus compile all the reports and update your credit score. Keep in mind that your bank or issuing agency may report to just one or two of the credit bureaus. If trying to maintain a low utilization ratio is not for you, make payments right before your balance is reported to the credit bureaus. This way, the reports will show you pay your bills on time and will reflect a lower utilization ratio.
Keep Old Accounts
Another way to raise your score is keep your old accounts and refrain from opening new ones. If you have an existing account with little to no fees and decent interest rates, use it to pay a recurring bill such as utilities, gas, insurance, etc. Since your credit score is also based on your history, closing old accounts will clear your payment history and creditworthiness. When the credit bureaus receive your reports, the low utilization ratio from your old accounts will be considered when updating your overall score. While new accounts temporarily increase your credit limit, they may also imply you cannot pay off your debt. Even if you do not use your old accounts regularly, having longevity is more valuable than opening a new account.
Improving your credit score may sound like a long process, but it can benefit you greatly in the long run. There are many advantages to having a good credit score and your score can impact much more than getting approved for a credit card. A higher score can get you a higher limit, better interest rates and terms, higher approval rates, little to no security deposits or insurance premiums for mortgages, leases, insurances, and other financing needs, and even a better job. If you are interested in improving your credit score, give us a call at 855-990-7283 to learn more about a cash out refinance.